June 28, 2006

Thinking About Long-Term Care Insurance

I’ve always dreaded when people ask me whether they should buy long term care insurance. They assume that as a physician specializing in the care of geriatric patients, I should know the answer, or at least have an opinion. There are so many different policies and people’s circumstances vary so much that I’ve never known what to say. Now the AARP (American Association of Retired Persons) Public Policy Institute has commissioned a report that sheds considerable light on the subject: “Comparing Long-Term Care Insurance Policies: Bewildering Choices for Consumers” (May, 2006). I still don’t have an answer, but at least I understand the issues better.

By way of background, we should all recognize that we face a substantial risk of needing nursing home care. Nearly 50% of people who recently turned 65 can expect to spend some time in a nursing home before they die. For many this will be the last place they live in; for some, it will be a facility where they stay for rehabilitation after hospitalization. The majority of people over age 80 need some form of long term care—fully 68% of men and 77% of women who live at home need assistance with everyday activities (see Wan He, Manisha Sengupta, Victoria Velkoff, and Kimberly DeBarros: US Census Bureau, Current Population Reports, P23-209, 65+ in the United States: 2005. US GPO, Washington, DC, 2005.

We should also be aware that Medicare pays for only a small fraction of our long- term care needs. Medicare covers up to 100 days of skilled nursing home care each “benefit period,” (where a benefit period typically starts at the time of hospitalization). But this kind of “skilled nursing home” care involves short-term rehab after a hospital stay only. Medicare may also pay for a home health aide or homemaker for a limited time after an acute illness. It does not pay for the kind of ongoing care than an older person with one or more chronic diseases may need. Medicaid, the insurance program for the poor and the disabled, does pay for nursing home care or services in the home for those who have used up most of their resources. The actual Medicaid eligibility criteria vary considerably from state to state since Medicaid is a joint federal-state program.

If you think you want to get long term care insurance, you typically need to choose among policies that only cover care in institutional settings, policies that only cover care at home, and comprehensive policies that provide both. While some people figure that the point of a policy is to be able to pay for home care so as to avoid going into a nursing home and therefore are interested only in a home-care policy, the coverage provided is likely to be inadequate to pay for full time help. Many people decide that if they’re going to get long-term care insurance, they may as well guard against all eventualities.

Finally, consumers should be aware that their premiums can increase. Insurance companies cannot single out particular individuals for increases based on their particular circumstances, such as their health. They can, however, raise premiums to entire groups of people, for example those over age 75. Here are some of the specific questions you need to ask if you are looking at a LTC policy:

Does it cover assisted living?

State laws often require that those LTC policies that cover “facility care” provide coverage for assisted living facilities. However, there is no standard definition of assisted living, so insurers can claim that a particular assisted living facility does not qualify.

What level of disability is needed to qualify?

LTC policies only kick in if the insured meets a specified level of disability. Most (but not all) policies accept the standard of impairment in at least 2 activities of daily living (such as dressing, bathing, or going to the bathroom). However, insurance companies can choose how they will determine if you are dependent in these areas.

What is the daily benefit?

The daily benefit amount provided can be as low as $50 a day or over $300 per day. In some cases, if your benefit ceiling is $150/day and your costs are $100/day, you effectively forfeit the difference, even if the following year you enter a nursing home and your costs go up. Another approach is to use a “pool of money.” The total benefit is then the daily benefit times the number of days of coverage (ie the duration of the policy). The pool can be spent for any combination of services: it might be spent slowly (if your only needs are modest home care) or more quickly (in a nursing home).

How long is the waiting period?

Once a person has met the policy’s “disability trigger,” the waiting period is the time before the benefit actually begins. If you have a 100-day waiting period, and nursing home care costs $150/day, you will have to pay $15,000 before the insurance company starts to pay.

What is the duration of the benefit?

Once you start using the LTC benefit, you may have anywhere between 1 year’s worth of coverage and a lifetime’s worth. Most people who need long-term care need it for several years.

Does it have inflation protection?

Unless you have inflation protection, the daily benefit will lose in value relative to the cost of care. This is an especially severe problem for younger purchasers whose benefit may be inadequate to cover the costs of care years later.

Summary

As the AARP report suggests, it would be very helpful if the government mandated standard policy benefits and provisions, just as is the case for supplemental Medicare policies. In addition, it would be desirable to require companies to offer to pay family caregivers. Finally, LTC policies that pay benefits for multiple types of care should make the total value of all benefits available in any covered setting.

Until such regulations are passed, consumers are faced with a confusing array of possibilities. If you decide you want to buy LTC insurance, you should generally choose a comprehensive policy. You should make sure that by “comprehensive” it in fact does cover assisted living facilities. You probably will want a policy that specifies the maximum total amount it will pay out and that allows you to allocate that amount between home care, assisted living, and nursing home care, as you see fit. You should be sure that the benefit will go into effect once you are dependent in 2 activities of daily living, that the waiting period if no more than 100 days, and that the duration of coverage is at least 3 years. The cost of the premium for such a policy may be very high. Once the insurance agent quotes you a premium, you will need to consider whether you would be better off setting aside money regularly as a special LTC fund for yourself.

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